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“investments” promoted by Little, Fritts, and Rowe were in
reality scams, and petitioners never recovered their money. The
“cash for title” loan program investment was in reality a large-
scale, international Ponzi scheme.
Little, Fritts, and Rowe represented to petitioners that the
investment would provide high-interest consumer loans. Contrary
to those representations, most of the proceeds were used to pay
interest and principal to earlier investors, as well as
commissions and fees to the promoters. Petitioners did not make
a profit on the investments. Rather, they lost most of the money
they invested.
The weight of authority holds that certain distributions to
taxpayers in Ponzi or pyramid schemes (where proceeds of later
investors are used to pay distributions to early investors,
lending an appearance of legitimacy to a fraudulent “investment”)
are current income. Parrish v. Commissioner, T.C. Memo.
1997-474, affd. 168 F.3d 1098 (8th Cir. 1999); Premji v.
Commissioner, T.C. Memo. 1996-304, affd. without published
opinion 139 F.3d 912 (10th Cir. 1998); Wright v. Commissioner,
T.C. Memo. 1989-557, affd. without published opinion 931 F.2d 61
(9th Cir. 1991); Murphy v. Commissioner, T.C. Memo. 1980-218,
affd. per curiam 661 F.2d 299 (4th Cir. 1981); Harris v. United
States, 431 F. Supp. 1173 (E.D. Va. 1977). In all but one of the
above cases, however, the taxpayers were early investors who had
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